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TLF > SEC Filings for TLF > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for TANDY LEATHER FACTORY INC

Form 10-Q for TANDY LEATHER FACTORY INC


14-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

Our Business

We are the world's largest specialty retailer and wholesale distributor of leather and leathercraft related items. We market our products to our growing list of customers through company-owned retail and wholesale stores. We are a Delaware corporation, and our common stock trades on the NASDAQ Global Market under the symbol "TLF." We operate our business in three segments: Wholesale Leathercraft, which operates wholesale stores in North America under the trade name, The Leather Factory, Retail Leathercraft, which operates retail stores in North America under the trade name, Tandy Leather Company, and International Leathercraft, which operates combination retail/wholesale stores outside of North America under the trade name, Tandy Leather Factory. See Note 7 to the Consolidated Financial Statements for additional information concerning our segments, as well as our foreign operations.

Our Wholesale Leathercraft segment operates 29 company-owned wholesale stores in 19 states and three Canadian provinces. These stores are engaged in the wholesale distribution of leather and related items, including leatherworking tools, buckles and belt adornments, leather dyes and finishes, saddle and tack hardware, and do-it-yourself kits, to retailers, manufacturers, and end users. Our Wholesale Leathercraft segment also includes our National Account sales group, whose only customers are national craft chains.

Our Retail Leathercraft segment operates company-owned Tandy Leather Company retail stores in 37 states and six Canadian provinces. Tandy Leather Company, one of the best-known suppliers of leather and related supplies used in the leathercraft industry, has been a primary leathercraft resource for decades. Tandy Leather Company's products include quality tools, leather, accessories, kits and teaching materials. In 2002, we began expanding Tandy Leather Company's industry presence by opening retail stores. As of May 1, 2014, we were operating 80 Tandy Leather Company retail stores located throughout the United States and Canada.

Our International Leathercraft segment operates 3 company-owned stores, all located outside of North America. These stores operate as combination retail / wholesale stores and consist of one store in Northampton, United Kingdom, one store in Sydney, Australia, and one store in Jerez, Spain. We expect to continue opening international stores in the future, but do not intend to open any new international stores in 2014.

Critical Accounting Policies

A description of our critical accounting policies appears in Item 7 "Management's Discussions and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Forward-Looking Statements

Certain statements contained in this report and other materials we file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made or to be made by us, other than statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally are accompanied by words such as "may," "will," "could," "should," "anticipate," "believe," "budgeted," "expect," "intend," "plan," "project," "potential," "estimate," "continue," or "future" variations thereof or other similar statements. There are certain important risks that could cause results to differ materially from those anticipated by some of the forward-looking statements. Some, but not all, of the important risks, including, without limitation, those described below, could cause actual results to differ materially from those suggested by the forward-looking statements. Please refer also to our Annual Report on Form 10-K for fiscal year ended December 31, 2013 for additional information concerning these and other uncertainties that could negatively impact the Company.

Our business may be negatively impacted by general economic conditions in the United States and abroad.

Our performance is subject to worldwide economic conditions and their impact on levels of consumer spending that affect not only the ultimate consumer, but also small businesses and other retailers. Specialty retail, and retail in general, is heavily influenced by general economic cycles. Purchases of non-essential products tend to decline in periods of recession or uncertainty regarding future economic prospects, as disposable income declines. During periods of economic uncertainty, we may not be able to maintain or increase our sales to existing customers, make sales to new customers, open and operate new stores, maintain sales levels at our existing stores, maintain or increase our international operations on a profitable basis, or maintain our earnings from operations as a percentage of net sales. The United States and global economies have suffered from economic uncertainty for the past several years. Consumer spending in the United States appears to have stabilized recently, but could deteriorate in the future. As a result, our operating results may be adversely and materially affected by downward trends or uncertainty in the United States or global economies.

Our profitability may decline as a result of increasing pressure on margins.

Our industry is subject to significant pricing pressure caused by many factors, including fluctuations in the cost of the leather and metal products that we purchase and changes in consumer spending patterns and acceptance of our products. Changes in consumers' product preferences or lack of acceptance of our products with respect to which costs have increased may prohibit us from passing cost increases on to customers which could cause our gross margin to decline. If our product costs increase and our sale prices do not, our future operating results could be adversely affected unless we are able to offset such gross margin declines with comparable reductions in operating costs.

We may be unsuccessful in implementing our planned international expansion, which could impair the value of our brand, harm our business and negatively affect our results of operations.

We plan to grow our net sales and net earnings from our International Leathercraft segment by opening stores in various international markets. As we expand outside of North America, we may incur significant costs relating to starting up, maintaining and expanding foreign operations. Such costs may include, but are not limited to, obtaining locations for stores, hiring personnel, and travel expenses. We may be unable to open and operate new stores successfully and as a result, our growth may be limited, unless we are able to identify desirable sites for store locations, negotiate acceptable lease terms, hire, train and retain competent store personnel; manage inventory effectively to meet the needs and demands of customers on a timely basis, manage foreign currency risk effectively, and achieve acceptable operating margins from the new stores. We cannot be sure that we can successfully open new stores or that those new stores will be profitable. If we are unable to successfully open new stores or our new stores are not profitable, our business and our results of operations could be adversely affected.

As we continue to increase our international operations, we face the possibility of greater losses from a number of risks inherent in doing business in international markets and from a number of factors which are beyond our control, such as political instability or acts of terrorism, which disrupt trade with the countries in which our suppliers or customers are located; local business practices that do not conform to legal or ethical guidelines; restrictions or regulations relating to imports or exports; additional or increased customs duties, tariffs, taxes and other charges on imports; significant fluctuations in the value of the dollar against foreign currencies; social, legal or economic instability in the foreign markets in which we do business, which could influence our ability to sell our products in these markets; and restrictions on the transfer of funds between the United States and foreign jurisdictions. The occurrence of any of these events could adversely affect our business and our results of operations.

We assume no obligation to update or otherwise revise our forward-looking statements even if experience or future changes make it clear that any projected results, express or implied, will not be realized.

Results of Operations

Three Months Ended June 30, 2014 and 2013

The following tables present selected financial data of each of our three
segments for the quarters ended June 30, 2014 and 2013.

                        Quarter Ended June 30,         Quarter Ended June 30,
                                 2014                           2013
                          Sales         Income           Sales         Income
                                         from                           from
                                      Operations                     Operations
Wholesale Leathercraft  $6,457,467    $1,106,942       $6,728,586      $883,533
Retail Leathercraft     12,201,624     1,427,913       11,242,080     1,377,105
Int'l Leathercraft       1,044,516       121,422        1,002,347        85,426
Total Operations       $19,703,607    $2,656,277      $18,973,013    $2,346,064


TABLE OF CONTENTS
Consolidated net sales for the quarter ended June 30, 2014 increased approximately $730,000, or 3.9%, compared to the same period in 2013. Retail Leathercraft reported the largest percentage sales gain of 8.5%, followed by International Leathercraft, reporting a sales gain of 4.2%. Wholesale Leathercraft reported a sales decrease of 4%. Income from operations on a consolidated basis for the quarter ended June 30, 2014 increased 13.2%, or approximately $310,000, from the second quarter of 2013 due to the improvement in gross profit margin.

The following table shows in comparative form our consolidated net income for the second quarters of 2014 and 2013:

2014 2013 % change
Net income $1,765,485 $1,629,353 8.4%

All segments contributed to our consolidated net income. Additional information appears below for each segment.

Wholesale Leathercraft

Our Wholesale Leathercraft operation consists of 29 wholesale stores and our
National Account sales group. The National Account sales group's customers
consist of national craft chains only. The following table presents the combined
sales mix by customer categories for the quarters ended June 30, 2014 and 2013:

                                                 Quarter ended
Customer Group                                06/30/14   06/30/13
 RETAIL (end users, consumers, individuals)        43%        38%
 INSTITUTION (prisons, prisoners, hospitals,        5%         5%
schools, youth organizations, etc.)
 WHOLESALE (resellers & distributors, saddle       44%        45%
& tack shops, authorized dealers, etc.)
 MANUFACTURERS                                      6%         6%
 NATIONAL ACCOUNTS                                  2%         6%
                                                  100%       100%

Net sales decreased 4.0%, or approximately $271,000, for the second quarter of 2014 compared to the second quarter of 2013 as follows:

                         #    Qtr Ended      #    Qtr Ended        $         %
                       Stores  06/30/14    Stores  06/30/13      Change   Change
Same store sales         29   $6,451,664     29   $6,347,666     $103,998    1.6%
National account group             5,803             380,920    (375,117) (98.5)%
Total sales              29   $6,457,467     29   $6,728,586   $(271,119)  (4.0)%

Sales to our retail and manufacturing customers increased in the second quarter of 2014 compared to the second quarter of 2013, while sales to our wholesale and institution group customers were down slightly. Sales to our national account customers ended in April - the result of a decision we made to eliminate certain products from our product line that these customers were buying. These products were eliminated due to unacceptable gross profit margins. Income from operations for Wholesale Leathercraft during the current quarter increased by $223,000 from the comparative 2013 quarter, an increase of 25%.

An increase in gross profit of approximately $126,000, along with a reduction in operating expenses of approximately $97,000, contributed to the improvement in income from operations compared to last year's second quarter. Gross profit as a percentage of sales increased from 69.1% in the second quarter of 2013 to 73.9% in the second quarter of 2014, due to an increase in sales to our retail customers, which generally brings higher gross profit margins as compared to other customer groups, and more sales of non-leather products, which also brings higher gross profit margins than that of leather sales. Operating expenses increased slightly as a percentage of sales due to the decrease in sales this quarter compared to last year's comparable quarter, but decreased in dollars. Expense decreases occurred in legal and professional fees, repairs/maintenance, and supplies. This was partially offset by an increase in employee compensation.

Retail Leathercraft

Our Retail Leathercraft operation consists of 80 Tandy Leather Company retail
stores at June 30, 2014 compared to 78 stores at June 30, 2013. Net sales
increased 8.5% for the second quarter of 2014 over the same quarter last year. A
store is categorized as "new" until it is operating for the full comparable
period in the prior year.

                   # Stores  Qtr Ended      #     Qtr Ended        $       %
                             06/30/14     Stores  06/30/13      Change   Change
Same store sales      76    $11,811,841     76   $11,077,281    $734,560   6.6%
New store sales       4         389,783     -              -     389,783    N/A
Closed store sales    2               -     2        164,799   (164,799)    N/A
Total sales           80    $12,201,624     78   $11,242,080    $959,544   8.5%

The following table presents sales mix by customer categories for the quarters ended June 30, 2014 and 2013 for our Retail Leathercraft operation:

                                                 Quarter ended
Customer Group                                06/30/14   06/30/13
 RETAIL (end users, consumers, individuals)        57%        57%
 INSTITUTION (prisons, prisoners, hospitals,        4%         5%
schools, youth organizations, etc.)
 WHOLESALE (resellers & distributors, saddle       36%        35%
& tack shops, authorized dealers, etc.)
 MANUFACTURERS                                      3%         3%
                                                  100%       100%

Sales to retail and wholesale customer groups increased over the second quarter of 2013, while sales to our institution and manufacturers customer groups declined slightly over the same period.

Income from operations increased approximately $51,000, in the quarter ended June 30, 2014, or 3.7%, from the comparative 2013 quarter due to an increase in gross profit offset partially by an increase in operating expenses. Our gross profit increased by approximately $638,000 from the comparable 2013 quarter primarily due to higher sales. Operating expenses as a percentage of sales rose from 47.1% in the second quarter of 2013 to 59.9% in the second quarter of 2014. The increase in operating expenses of approximately $587,000 in the second quarter of 2014 compared to the second quarter of 2013 was caused by increases in employee compensation and benefits (approximately $208,000), rent and utilities expense (approximately $137,000), and depreciation (approximately $49,000), and advertising expenses (approximately $125,000). A portion of these expense increases were attributable to the four new stores opened since November 2013.

International Leathercraft

International Leathercraft consists of all stores located outside of North America. As of June 30, 2014 and 2013, the segment contained three stores, with one each located in United Kingdom, Australia, and Spain. This segment's sales totaled approximately $1,044,000 for the second quarter of 2014, compared to approximately $1,002,000 in the second quarter of 2013, an improvement of 4.2%. Operating expenses totaled approximately $576,000 in the second quarter of 2014, up from approximately $516,000 in last year's second quarter. Employee compensation is this segment's largest expense, followed by advertising and marketing expenses, rent, travel, and shipping costs to customers.

Other Expenses

We paid approximately $45,000 in interest on our bank debt in the second quarter of 2014, compared to approximately $51,000 in the second quarter of 2013. We recorded an expense of approximately $10,000 for currency fluctuations in the second quarter of 2014. Comparatively, in the second quarter of 2013, we recorded income of approximately $38,000 for currency fluctuations.


TABLE OF CONTENTS

Six Months Ended June 30, 2014 and 2013

The following table presents selected financial data of each of our three
segments for the six months ended June 30, 2014 and 2013:

                  Six Months Ended June 30,       Six Months Ended June 30,
                             2014                            2013
                     Sales        Operating          Sales        Operating
                                    Income                          Income
Wholesale          $13,281,435    $2,479,579       $13,458,320    $1,896,498
Leathercraft
Retail              24,157,978     2,900,616        22,801,941     2,891,944
Leathercraft
International        2,102,660       242,745         1,950,579       178,482
Leathercraft
Total Operations   $39,542,073    $5,622,940       $38,210,840    $4,966,924

Consolidated net sales for the six months ended June 30, 2014 were up 3% compared to the same period in 2013, increasing approximately $1.3 million. Retail Leathercraft contributed the largest sales increase of approximately $1.4 million, followed by International Leathercraft reporting an increase of approximately $152,000. Wholesale Leathercraft reported a decrease of approximately $177,000. The increase in inventory at the stores, coupled with strong advertising efforts, contributed to the overall sales increase. Operating income on a consolidated basis for the six months ended June 30, 2014 was up 13.0% compared to the first half of 2013, increasing approximately $656,000.

The following table shows in comparative form our consolidated net income for the first half of 2014 and 2013:

2014 2013 % change Net income $3,619,897 $3,215,674 12.6%

Wholesale Leathercraft

Net sales decreased 1.3%, or approximately $177,000, for the first half of 2014
as follows:

                         #    Six Months Ended   Six Months Ended       $         %
                       Stores     06/30/14           06/30/13         Change   Change
Same store sales         29        $12,932,785        $12,791,987     $140,798    1.1%
National account group    -            348,650            666,333    (317,683) (47.7)%
Total sales               29       $13,281,435        $13,458,320   $(176,885)  (1.3)%

Sales to our national account customers have been declining over time due to the elimination of certain products from our product line that these customers were buying (as these products have not historically provided an acceptable gross profit margin). Our final sale to this customer group occurred in April 2014.

The following table presents the combined sales mix by customer categories for the six months ended June 30, 2014 and 2013:

                                               Six Months Ended
Customer Group                                06/30/14   06/30/13
 RETAIL (end users, consumers, individuals)        44%        39%
 INSTITUTION (prisons, prisoners, hospitals,        4%         4%
schools, youth organizations, etc.)
 WHOLESALE (resellers & distributors, saddle       42%        44%
& tack shops, authorized dealers, etc.)
 MANUFACTURERS                                      6%         6%
 NATIONAL ACCOUNTS                                  4%         7%
                                                  100%       100%

Operating income for Wholesale Leathercraft for the first half of 2014 increased by approximately $583,000 from the comparative 2013 period, a 31% improvement, due to an increase in gross profit and a reduction in operating expenses. Compared to the first six months of 2013, operating expenses decreased approximately $92,000 for the first half of 2014, holding steady as a percentage of sales at 51.4%.

Retail Leathercraft

Net sales were up 5.9% for the first half of 2014 over the same period last
year.

                        #    Six Months Ended Six Months Ended     $        %
                      Stores     06/30/14         06/30/13       Change   Change
Same (existing) store   76        $23,421,926      $22,471,947   $949,979   4.2%
sales
New store sales         4             736,052                -    736,052    N/A
Closed store sales      2                   -          329,994  (329,994)    N/A
Total sales             80        $24,157,978      $22,801,941 $1,356,037   5.9%

The following table presents sales mix by customer categories for the six months ended June 30, 2014 and 2013 for our Retail Leathercraft operation:

                                               Six Months Ended
Customer Group                                06/30/14   06/30/13
 RETAIL (end users, consumers, individuals)        59%        60%
 INSTITUTION (prisons, prisoners, hospitals,        4%         4%
schools, youth organizations, etc.)
 WHOLESALE (resellers & distributors, saddle       35%        34%
& tack shops, authorized dealers, etc.)
 NATIONAL ACCOUNTS                                   -          -
 MANUFACTURERS                                      2%         2%
                                                  100%       100%

The retail stores averaged approximately $50,000 in sales per month for the first half of 2014. By comparison, these stores averaged $49,000 in sales per month for the first half of 2013.

Operating income for the first six months of 2014 increased approximately $9,000 from the comparative 2013 period, decreasing as a percentage of sales from 12.7% in the first half of 2013 to 12.0% in the first half of 2014. Gross margin increased from 60.7% to 61.3% due to the customer and product mix. The ratio of retail sales, which brings a higher margin, to non-retail sales, which brings a lower margin, can affect gross profit margin positively or negatively. During the first six months of 2014, retail sales increased faster than non-retail sales, resulting in an improvement in gross profit margin. Operating expenses as a percentage of sales were 49.3% for the first half of 2014, increasing from 48.0% for the first half of 2013, as consolidated expenses grew faster than sales.


TABLE OF CONTENTS
International Leathercraft

International Leathercraft consists of all stores located outside of North
America. As of June 30, 2014 and 2013, the segment contained three stores with
one each located in United Kingdom, Australia, and Spain. Net sales increased
7.8% for the first half of 2014 over the same period last year. A store is
categorized as "new" until it is operating for the full comparable period in the
prior year.

                   #    Six Months Ended   Six Months Ended      $       %
                 Stores     06/30/14           06/30/13        Change  Change
Same store sales   3          $2,102,660         $1,950,579   $152,081   7.8%
New store sales    -                   -                  -          -      -
Total sales         3         $2,102,660         $1,950,579   $152,081   7.8%

Gross profit margin as a percentage of sales increased from 61.8% in the first half of 2013 to 65.6% in the first half of 2014. Selling prices are determined based on the currency conversion between the U.S. dollar and the local currency. In addition, gross profit margin is affected by sales mix - the ratio of higher margin products (tools, supplies, etc.) to lower margin products (leather). Operating expenses totaled approximately $1.1 million in the first half of 2014, up approximately $114,000 from approximately $1.0 million in the first half of 2013. Advertising expenses increased approximately $64,000 compared to the comparable period last year, while employee compensation increased approximately $18,000 and travel expenses increased approximately $20,000. Employee compensation is this segment's largest expense, followed by advertising and marketing expenses, shipping costs to customers, and rent.

Other Expenses

We paid approximately $91,000 in interest on our bank debt in the first six months of 2014, compared to approximately $108,000 in the first six months of 2013. We recorded approximately $3,000 in interest income on our cash balances in the six months ended June 30, 2014 compared to approximaely $1,600 in the six months ended June 30, 2013. We recorded an expense of approximately $18,000 for currency fluctuations in the first half of 2014. Comparatively, in the first half of 2013, we recorded income of approximately $50,000 for currency fluctuations.

Capital Resources, Liquidity and Financial Condition

On our consolidated balance sheet, total assets increased from approximately $56.4 million at year-end 2013 to approximately $62.7 million at June 30, 2014. Total stockholders' equity increased from approximately $44.6 million at December 31, 2013 to approximately $45.8 million at June 30, 2014, the increase being attributable to our net income earned in the first half of 2014, partially offset by the special, one-time dividend of approximately $2.5 million that was approved by our Board of Directors in June. Our current ratio decreased from 5.0 at December 31, 2013 to 3.4 at June 30, 2014 due primarily to the approximately $2.2 million borrowings on our line of credit in the second quarter of 2014 and the accrued dividend that will be paid in August.

As of June 30, 2014, our investment in inventory increased by approximately $9.7 million from year-end 2013. The majority of the increase was caused by the arrival in the second quarter of a large portion of the new products that we will introduce in our annual catalog later this year. Historically, the majority of that product arrives in the third quarter. Inventory turnover reached an annualized rate of 2.5 times during the first half of 2014, decreasing from 2.9 times for the first half of 2013. Inventory turnover was 3.0 times for all of 2013. We compute our inventory turns as sales divided by average inventory.

Trade accounts receivable was approximately $796,000 at June 30, 2014, up approximately $34,000 from approximately $762,000 at year-end 2013. The average . . .

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